China’s economy expanded rapidly in recent years despite a dire international context, though it slowed in 2011-12. Rebalancing has made headway: externally, the current account surplus has fallen sharply, from over 10% of GDP in 2007 to under 3%; domestically, growth has lately been pulled more by consumption than by investment. With the slowdown, inflation has been brought under control. More recently, activity has regained momentum, helped by policy easing and a pick-up in infrastructure spending, but the global economic context remains fragile. If needed, there is room for further cautious monetary and fiscal stimulus. In a longer-run perspective, China has now overtaken the euro area and is on course to become the world’s largest economy around 2016, after allowing for price differences. Living standards will continue to improve fast provided reforms are implemented, most of which feature in the 12th Five-Year Plan (2011-15) and in the conclusions of the November 2012 18th CCP Congress.

China has weathered the global economic and financial crisis of the past five years better than virtually any OECD country and than many other emerging economies. It is well placed to enjoy a fourth decade of rapid catch-up and improving living standards, notwithstanding various risks: in the near term, global economic conditions might be less supportive than projected; there are also concerns about property prices and excessive off-balance sheet financing by the banking system and local governments; and over the longer run, inequalities and ageing are sources of tension. However, China can avoid the middle-income trap provided reforms are continued or stepped up. Encouragingly, in November 2012, the 18th Congress of the Chinese Communist Party called for further reforms in a number of areas, most of which are touched upon in this Survey ().

Urbanisation in China has long been held back by various restrictions on land and internal migration but has taken off since the 1990s, as these impediments started to be gradually relaxed. People have moved in large numbers to richer cities, where productivity is higher and has increased further thanks to agglomeration effects. In the process, the rural-urban income differential has narrowed. Urbanisation also entails costs, however, notably in the form of congestion, all the more so as public transport provision has not kept up. Demand for living space is set to continue to increase as living standards improve, putting pressure on land prices. This can be offset by relaxing the very stringent restrictions on the use of agricultural land for building. For migrants to better integrate in the cities where they work, their access and that of their families to education, health and other social services must continue to improve, in particular via further changes to the registration system, coupled with more market-based rules on land ownership and use.

China’s exceptional economic expansion has led to rising energy demand and pollution as well as other environmental pressures. Strong efforts by the government have moderated emissions of some types of air and water pollution from high levels but others, including greenhouse gas emissions, continue to rise. Poor air and water quality threaten human health, create other costs and reduce well-being. The 12th Five Year Plan aims at further reducing pollution and at other environmental improvements. To achieve these goals in a cost-effective manner wide-ranging reforms are needed. Reliance on command-and-control measures ought to make way gradually for well-implemented market-based approaches. Energy and water pricing need to be reformed to provide stronger incentives for end-users. So does pollution pricing. A carbon tax should be given serious consideration, especially if pilot carbon emissions trading schemes turn out to be difficult to implement. As well, stronger standards are needed, including for motor vehicles and fuels. Efforts to enhance environmental enforcement, particularly at the local level, will also be key to further progress.